Subscription SaaS Business Models: Key Things You Need to Know
Demystifying Subscription SaaS : Learn how businesses sell software as a service & gain recurring revenue. Explore pros & cons.
Subscription SaaS
Companies that supply software as a service (SaaS) can often sell their products through the subscription SaaS model. In such a business design, SaaS companies may provide services based on a monthly or yearly basis. In return, they receive steady monthly or annual revenue and a plethora of other benefits.
Such an approach is simple and works by customers paying a priorly-set amount once a month, once every six months, annually, or another agreed-upon section of time. In turn, they gain services.
Subscription-based SaaS companies reap plenty of benefits, from the ability to strengthen and grow their customer base to the ease and automation of easily-understood pricing models. Subscription-based companies in the world of SaaS are also often able to retain existing customers more easily, calculate projected revenue more efficiently, and scale their businesses to the degree they desire.
What are Subscription SaaS Companies' Business Models?
SaaS business models, as previously mentioned, work by providing an agreed-upon service for a set number of days, weeks, months, or years. According to Investopedia, subscription SaaS business models are conceptualized from the goal of being able to sell a product or service and receive a steady subscription revenue.1
Various different models exist for SaaS companies that wish to utilize the ease and automation of subscription business models. Take, for example, the Term Subscription Model.
Some popular subscription-based SaaS companies include many streaming services, such as Netflix or Hulu, and software companies, such as Quickbooks, Hubspot, and more.
Term Subscription Model
The Term Subscription Model in SaaS is a business design that entails customers signing up for a service for a particular term. In such a design, customers sign an electronic or paper contract that signs them up for their chosen service (or group of services) for a particular period. These contracts may contain cancellation provisions, set expiration dates, and other terms.
In the case of Term Subscription Models, terms may vary in length. For example, some terms may last quarterly, while others may last monthly or annually.
SaaS Business Model Types & Monetization Models
Not all successful SaaS business models are subscription-based. In fact, some are of quite the opposite variety. Some business models for SaaS companies (that may or may not involve subscription-based revenue models) include freemiums, flat rate, feature-based pricing, pricing per user, pricing per active user, term subscription, and more. Keep in mind that some of these models may overlap, and some businesses use more than one model to operate their SaaS company.
Freemium SaaS Business Model
The word "freemium" combines the words "free" and "premium." According to Investopedia, a freemium business model is a kind of business model that offers basic features of a software, service, or product for free. However, to utilize the more exclusive features of this service, software, or product, the customer must purchase an advanced subscription or level of services.2
The chief purpose of freemium models is to attract customers. In other words, companies who use the freemium business model can use product marketing to lure customers into using your software with a free (but often limited) version of your SaaS product. Companies that offer "free trials" often utilize the freemium SaaS business model.
A few key factors drive the success of SaaS companies whose driving business model is the freemium. First, a great, top-of-the-funnel way to help attract potential customers and position yourself as a trustworthy company with a reputable product is to offer free services. By providing free services, you can help lock in potential customers to become active users who can utilize the free services of your product. Once your potential customers convert into actual customers, they will begin to understand your digital product's value. In turn, this will present you with plenty of opportunities to market your exclusive services.
When employing a freemium model for your digital product, be sure to closely watch your metrics and continually adjust the offerings you deem free or exclusive. For example, if you are attracting a lot of traffic but too few customers are subscribing to your elite services, it may be time to offer fewer services for free and increase your product's exclusivity.3
Flat-Rate Business Model
A flat-rate business model is a business model that consists of the customer paying for the product, service, or software all at once (and usually up-front). The flat-rate business model is beneficial for various reasons; first, it asks that customers pay a one-time fee in the beginning, cutting out the need for a monthly fee. This sometimes tends to make pricing easier to understand for customers and prevents any pricing-related confusion.
For example, BaseCamp is a communication and task management software that values simplicity in its user experience. To match its pricing strategy with its value of simplicity, Basecamp offers a flat-rate pricing strategy to its customers.
Flat Rate business models make forecasting revenue much more straightforward than other SaaS business models might. The simplicity of this pricing structure also tends to help customers feel more secure with their purchases. However, the flat rate business model can also be limiting and may not be the right choice for all customers. Therefore, when choosing whether or not to employ a flat rate structure to your SaaS business, you must take your product, services, and target users into careful consideration.
Feature-Based Pricing
Feature-based pricing, or per-feature pricing, is another clever business model used by SaaS startups worldwide. Feature-based pricing entails what its name conveys: customers pay for your product in pieces, based on which features they'd like to choose and use.
In a feature-based pricing model, different features may be separated into other packages or tiers. An example of a per-feature pricing model in the real world is Quickbooks. This software combines services such as accounting, bookkeeping, invoicing, payroll, and more with various levels of functionality. Quickbooks customers can choose the particular package of this software they'd like to purchase via an ongoing subscription or flat rate.
One significant advantage of feature-based pricing includes more customization for customers. By choosing the particular features they'd like to pay for, customers are able to choose a more customized product for themselves that fits their specific needs. Unlike a one-size-fits-all approach, feature-based pricing allows customers more autonomy and flexibility. It empowers them to choose the particular functions of your product they'd like to use.
Per-User Pricing
Per-user pricing is a pricing strategy that many SaaS companies use to help businesses scale at a fair rate. The per-user pricing business model is relatively simple and easy to understand; companies charge an additional fee for each user that adopts and operates the SaaS product.
Per-user pricing helps businesses easily calculate how much money they will need to spend on a particular SaaS service by calculating the number of people on their team adopting and using this product. Per-user pricing is also often relatively straightforward and transparent, fostering trust between SaaS companies and customers and helping cultivate healthy levels of customer retention.
Advantages of the Subscription SaaS Business Model
The SaaS subscription model offers various perks and benefits, often including:
- Lower costs for customers and businesses.
- Ease in revenue projection and overall automation.
- More substantial customer retention.
Monthly subscription pricing and other subscription business models also help business owners scale their companies. Through the SaaS subscription model, it may also be easier to integrate certain scalability efforts.
Disadvantages of Using a Subscription-Based SaaS Business Model
Despite its various perks, utilizing a subscription-based SaaS business model has its downsides.
- Customer dissatisfaction. First, subscription-based SaaS business models may fail customers in one particular way: the annoyance that can sometimes accompany being "locked-in" to a subscription, especially if they stop using it or forget to use it. There are various ways to help prevent this predicament. Still, it must be considered to successfully use a subscription-based business model for your SaaS company.
- Customer distrust. Sometimes, when asked to sign up for a subscription-based SaaS product, customers will struggle to trust that this product will be what they want. This can often be solved by adding additional options to your pricing strategies, such as offering a free trial period or blending a subscription-based SaaS pricing strategy with a freemium pricing strategy.
- Total vendor lock-in. Total vendor lock-in can make customers feel trapped and highly dissatisfied with your product. However, you can prevent this by offering specific opt-out options for customers and lowering switching costs.
- Distrust of data sharing. Now more than ever, consumers are paying attention to who uses their personal information - and for what purposes. It's challenging to know which websites, software, services, products, and overall businesses to trust with your personal information nowadays. One way to help eliminate distrust in your product is by clearly outlining and presenting how your product will use and share customers' data.
UX in SaaS: How to Nudge Users & Build the Paying Page
Conversion in SaaS depends on a variety of factors. However, intentional UX design can help push users towards taking action and pressing that coveted "subscribe" button.
WANDR encourages you to utilize behavioral models that describe what makes people act. By incorporating savvy behavioral models with an overall funnel approach to digital marketing, you can attract, onboard, and retain customers.
The Fogg Behavioral Model, for example, claims that in order to persuade users to take action, you must motivate them, make it easy for them to take the desired action, and then prompt them to act. By following models such as this in UX design and copy, you will be able to build a paying page and nudge users to take your desired action.4
FAQs:
FAQ: Why is SaaS the dream of traditional software?
Software as a service is particularly intriguing for traditional software companies. Why?
SaaS companies offer certain benefits, including:
- Speed. SaaS companies are quick and operational immediately.
- Accessibility. SaaS can be used on various devices.
- Automatic bug fixes and updates.
- Scalability. SaaS companies adapt to the needs of the market and the company in real-time.
FAQ: Why are companies adopting the SaaS model?
Once again, companies are adopting the SaaS model so that they can reap the benefits that SaaS businesses frequently bring, such as speed, accessibility, automation, scalability, and more.
Conclusion
Overall, remember that pricing strategies are critical to the success of your business and ought to be examined routinely and consistently. Pricing strategies and subscription-based business models should also always align with your product's packaging and depict your brand's values. Sometimes, pricing strategies and subscription-based SaaS business models will need to be altered, adjusted, or changed entirely, and this is okay. Pricing should also always scale alongside your business's growth.
If you’re searching for valuable UX design insight and services, contact WANDR today. We can help you visualize and create the product of your dreams.
